June 19th, 2012

Euro Futures – The euro strengthened against the dollar after a European Union official said a politically acceptable path will be sought for renegotiating Greece’s bailout conditions.

The U.S. currency fell against most of its major counterparts as the Federal Reserve starts a two-day meeting where 12 primary dealers expect some form of added stimulus from the central bank, while nine expect no action. The pound weakened versus the euro after U.K. inflation slowed in May to the least in 2 1/2 years. Mexico’s peso and Canada’s dollar rose after a report showed a measure of future construction in the U.S. climbed to the highest since September 2008.

“There is some temporary relief for the euro that the news out of Greece has been better, but nothing has really changed; we still see the euro at $1.20 in the second half of the year,” said Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York. “A lot of people are expecting more easing from the Fed, so people want to be ready to take advantage of that.”

The euro appreciated 0.9 percent to $1.2689 at 11:23 a.m. New York time. It reached $1.2748 yesterday, the strongest level since May 22. The shared currency gained 0.8 percent to 100.27 yen. The dollar weakened 0.1 percent to 79.01 against the Japanese currency.

Euro: Spanish Sale

The 17-nation currency erased a decline versus the yen as Spain sold its maximum target of 12- and 18-month bills even as yields rose. Spanish 10-year yields jumped 28 basis points, or 0.28 percentage point, to 7.16 percent yesterday, above the 7 percent rate that pushed Greece, Ireland and Portugal to seek rescue packages. The yield dropped 12 basis points to 7.03 percent today.

The implied volatility for one-month euro-dollar options, which indicates expected swings in the underlying currencies, slipped to 11.42 percent. It reached a high of 13.29 percent last week. While that’s up from 8.25 percent in April, it’s below last year’s peak of 18.42 in September. The JPMorgan G7 Volatility Index was at 10.53. It rose to 11.88 this month from 8.84 in April, the least since November 2007.

“Volatility today is rather low, the situation in Spain remains severe, the euro is coming back a bit, but Spanish 10- year bonds are still yielding over 7 percent,” said Lutz Karpowitz, a senior foreign-exchange strategist at Commerzbank AG, by phone from Frankfurt. “It’s some kind of minor intraday correction, but it’s not a sign of relief.”

Euro: Trend Change

The euro’s trend higher against the dollar since June 1 may be at risk, according to data compiled by Bloomberg. The 17- nation common currency faces so-called resistance versus the dollar at yesterday’s high of $1.2748, and may find support versus the dollar at $1.2288, the June 1 low, the data show.

A resistance level is an area on a price graph where analysts anticipate a grouping of orders to sell a currency and a support level occurs where they anticipate buy orders to be clustered.

Once a Greek government is formed, representatives of the so-called troika of the EU, International Monetary Fund and European Central Bank will travel to Athens and evaluate any requests for adaptations in the aid program, the official told reporters on condition of anonymity in Brussels today.

G-20 leaders are also meeting in Los Cabos, Mexico, for a second consecutive summit to be dominated by Europe’s debt woes, with Spain’s Prime Minister Mariano Rajoy attending the talks.

Euro Path

The euro is down from this year’s high of $1.3487 on Feb. 24, and has depreciated about 6.5 percent in the past 12 months against a basket of nine developed-market peers, according to Bloomberg Correlation-Weighted Indexes. The dollar has appreciated 6.4 percent and the yen advanced 6.2 percent.

Fed policy makers gather amid speculation they will consider further stimulus measures to sustain U.S. growth. The Fed will review new forecasts at its two-day meeting as it contends with continuing financial stress in Europe and a U.S. unemployment rate that has remained above 8 percent for 40 consecutive months.

The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, declined 0.7 percent to 81.386, after yesterday touching 81.161, the lowest level since May 22.

JPMorgan Chase & Co. and Jefferies Group Inc. predict policy makers will extend the Fed’s so-called Operation Twist. The $400 billion program, which was announced in September and ends this month, involved selling short-maturity debt and buying longer-term bonds.

Fed Moves

“A mere extension of Operation Twist may disappoint markets that have been expecting something more aggressive,” said Yuki Sakasai, a currency strategist at Barclays Capital in New York. “That may lead to some selling of risk currencies, and buying back of the dollar.”

Canada’s dollar rose 0.6 percent to C$1.0179, after touching C$1.0152, the strongest since May 22. Mexico’s peso rallied again all its major counterparts, gaining 1 percent to 13.6971 per dollar.

Building permits in the nation’s biggest trading partner, climbed to the highest level since September 2008, showing the combination of lower prices and record-low mortgage rates is underpinning demand and encouraging new projects.

The pound depreciated 0.5 percent to 80.71 pence per euro.

U.K. consumer prices rose 2.8 percent in May from a year earlier, compared with a 3 percent increase in April, the Office for National Statistics said today in London. That’s the weakest since November 2009.

- Allison Bennett in New York and Keith Jenkins in London at Bloomberg.